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Donald Trump's sweep to victory in the U.S. presidential election has ignited the so-called "Trump trade", with the dollar, crypto and U.S. stocks all surging, as investors assess the global implications of his return to power.

Germany is grappling with a political crisis, Britain's finance minister delivers a key speech and policymakers head to Baku for a climate summit.

Here's a look at the week-ahead for markets from Kevin Buckland in Tokyo, Lewis Krauskopf in New York, Sinead Cruise, Dhara Ranasinghe and Karin Strohecker in London.

Focus turns to U.S. inflation data on Nov. 13, as markets wait to see if President-elect Trump will push ahead with economic policies that could be inflationary.

Economists expect the consumer price index to have climbed 0.2% for October. September's 2.4% annual increase was the smallest in more than 3-1/2 years, reinforcing Federal Reserve rate-cut bets.

But the central bank may have been thrown a curveball with Trump's election, since the Republican's plans to raise tariffs could fuel price rises. Following the Fed's 25 bps rate cut on Thursday, Chair Jerome Powell gave little guidance on how fast and far rates will now fall.

Markets are also watching whether "Trump trades" - including a stronger dollar and buying shares of banks and small-cap companies - will continue as investors assess the impact of the election result.

A closely watched gathering of China's top legislative body wrapped up on Friday with the announcement of a 6 trillion yuan ($835 billion) spending package aimed at cleaning up off-the-book debt at local governments.

For investors who had been hoping for extra spending to counter the potential impact of a Trump-led trade war, that was a massive let-down. Hong Kong-traded mainland property shares tumbled as much as 4.6% on Monday. The yuan fell, and commodities from crude to copper sold off.

Some analysts had warned it would be too early for Beijing to formalise a strategy only days after Trump's election victory. Macquarie, for one, said the goal of the stimulus is achieving the around-5% growth target for 2024, and "not to reflate the economy in any meaningful way".

With Trump's threatened 60% tariffs dwarfing those from eight years ago, meeting that growth target may be the least of Beijing concerns.

A collapse in Germany's ruling coalition puts a crisis in Europe's biggest economy in the spotlight just after Trump's win.

Chancellor Olaf Scholz's decision to fire his finance minister, from coalition partner the Free Democrats, points to a vote of no confidence in January and possible snap elections in March.

Scholz's Social Democrats now rule with remaining coalition ally the Greens in a minority government but face pressure to hold a no-confidence vote sooner. A contentious draft budget also needs to be finalised.

The timing is unfortunate. Germany has just dodged recession after a series of setbacks, while higher tariffs may loom under Trump.

Uncertainty could hurt business investment and slow M&A. As an election-packed year globally winds down, Germany could be gearing up to hold a poll of its own.

Policymakers and climate activists head to Azerbaijan's capital Baku from Nov. 11 for the 29th annual United Nations Climate Summit, known as COP29.

The summit has been dubbed the "climate finance COP" for its central goal: to agree on how much money should go each year to helping developing countries cope with climate-related costs.

Governments are also eager to resolve rules for trading carbon credits earned through the preservation of forests and other natural carbon sinks.

But coming just days after the U.S. elections and amid rising geopolitical tensions, the meeting is expected to be a subdued affair. Trump, a climate denier, wants to ramp up fossil fuel production and pull out of the Paris Climate Accords, a framework for reducing global greenhouse gas emissions.

UK finance minister Rachel Reeves will serve up her latest plans to reinvigorate Britain's sluggish capital markets in her first Mansion House speech on Thursday, with a slew of pension fund reforms topping industry wish-lists.

UK defined benefit retirement schemes, most of which are closed to new members, are collectively sitting on an estimated 300 billion pounds of cash that could be funnelled into housing, infrastructure, unlisted company investments and unloved stocks for the greater good of the UK economy, industry sources say.

But while change is broadly welcome, the idea of mandating pension fund investment in so-called UK productive finance has been criticised because of the risk that good intentions may not always lead to good outcomes for retirement savers, particularly as UK equities continue to perform poorly against global peers.

New Zealand's central bank will be under greater pressure to ease policy aggressively this month as its rate meeting calendar leaves an unusually long three-month gap until its next gathering, arguing for extra insurance against an economic slump.

That is partly why markets and analysts have fully priced in another large 50-basis-point rate cut from the Reserve Bank of New Zealand at its last meeting for the year on November 27.

Even a whopping 75 basis point cut is also considered a possibility.

"I think front loading the rate cut has some optional values for the RBNZ. It means they can go into the Christmas break with a policy stance that's closer to neutral," said Faraz Syed, a senior economist at Citi Australia, which has called for 75 bp move in November. "That's what the economy requires."

The RBNZ cut the number of its policy meetings to seven from eight in 2016, which has allowed policymakers to enjoy a nearly three-month year-end break. That is unusually long for a major central bank - most central banks break for a month or two.

Michael Reddell, a former RBNZ official, said the RBNZ made the scheduling decision at a time when the cash rate was hardly being moved at all, which reduced the significance of the decision.

"I wouldn't be surprised if they were doing things over again they went back to eight... If I was sitting on the monetary policy committee today, I'd be certainly advocating a shift to eight meetings a year."

Just last week, the RBNZ sounded the alarm on further economic weakening even though rates have been chopped by 75 bps in just two meetings. Rising unemployment is likely to cause more borrowers to default on their mortgage payments over the next six months, it warned.

Between 2021 and August, the RBNZ had raised interest rates by 525 basis points to a 16-year high of 5.5% to stamp out surging inflation. Headline inflation, which peaked at 7.3%, slowed to 2.2% in the September quarter, back in the target band of 1-3%.

But that came with a hefty price. New Zealand's economy shrank from a year ago in the second quarter, with a gauge of living standards - gross domestic product per capita - falling for a seventh straight quarter.

The central bank won't meet again until February 19, a month after the inauguration of Donald Trump as U.S. president, when the economic landscape could be drastically different.

Even as the outlook for further U.S. rates has become more clouded, expectations that Trump's proposed policies including global tariffs will stoke inflation have seen borrowing costs surge globally. In New Zealand, a key short-term swap rate jumped 19 basis points last week, almost equal to a quarter-point hike in official rates.

That tightening comes at exactly the wrong time for the economy and again argues for drastic easing by the RBNZ.

"I think it does make it tricky that they have this long summer gap. It's basically 12 weeks between decisions and usually it's sort of six to seven," said Zoe Wallis, an investment strategist at Forsyth Barr.

The prolonged downturn in the economy saw the jobless rate hit a near four-year high of 4.8% in the September quarter as employment dropped by most in four years.

Worryingly, there were clear signs young people were quitting the workforce, discouraged by a dearth of vacancies.

Goldman Sachs said a 75 bp move can be justified given how far rates are above the neutral rate of 3%, the long lags of policy and the near three-month meeting gap, but it is sticking with a 50 bp move to be followed up by another 50 in February.

That's partly due to comments from Governor Adrian Orr in late October that he was still a tad concerned about lingering inflation pressures. Rates on the way down probably will be more incremental than on the way up, Orr told an event in Washington.

Jarrod Kerr, chief economist at Kiwibank, agrees.

"Going 75 probably signals they're a bit worried about things and that certainly wasn't the sense we got from Adrian Orr... I think they will deliver 50 and then another one in February."

It's old news by now, but Donald Trump was announced as President-elect Wednesday morning. It was a catalyst-heavy week for markets, from U.S. elections to the Federal Reserve. Below, we get you up to speed on the market moves driven by the events that were.

U.S. large cap equities rallied to all-time highs. Last Wednesday's +2.5% gain was the best one-day performance of 2024.

Industrials had their biggest one-day gain in two years, as markets anticipated what an “America first” agenda means for U.S. production.

Small caps were one of the beneficiaries on the last week (Solactive 2000 +7.6%). Better growth and fewer regulations could aid the group.

Deregulation should remove hurdles for mergers and acquisitions (M&A) and help thaw frozen activity. That's a big boost for financials. The large cap sector gained +5%, while the regionals gained +10.2%. The market is not just anticipating M&A, but also loan growth and less stringent capital buffers.

A GOP sweep (which most investors now expect) drove interest rates higher.

Yields on the 2-year (4.21%) and 10-year (4.36%) both jumped Wednesday (eight and 16 basis points, respectively) following election results, but have since partially retracted. Higher inflation and fiscal deficits may necessitate more compensation to invest in longer-maturity fixed income.

Following its biggest one-day appreciation in two years (+1.6%), the U.S. dollar paired back some gains.

A focus on onshoring and securing U.S. supply chains, combined with tariff threats (tariffs would reduce U.S. demand for imports, and thus, foreign currency to pay for those imports, increasing the value of the dollar, all else equal) resulted in a bullish backdrop for the dollar relative to foreign currencies.

Oil recaptured some gains after falling -9% in the month of September. OPEC+ delayed output hikes and the U.S. purchased oil to refill the strategic petroleum reserve. In the medium term, we think prices will be challenged given the likelihood of incentives for more production. We are likewise unexcited about energy equities.

Gold (-1.6%), which has reached several all-time highs throughout the year, took a step back. The move seemed to be driven by U.S. dollar outperformance, given the precious metal fared better when priced in foreign currencies.

Bitcoin jumped to all-time highs, and now sits at $75,960 per coin. Markets were excited about potential deregulation and the increased institutional adoption that could come, leading to the +10% pop.

While overshadowed by the election in the media landscape, we believe that the Federal Reserve and corporate earnings are more important for financial asset returns than politics. Chair Jerome Powell seemed to agree, saying that “the election will have no effect” on policy decisions in the near-term. Here's what happened in their latest meeting.

As widely anticipated, the Federal Reserve lowered their target interest rate range by 25 basis points to between 4.5 and 4.75%. The 25-basis point decision was unanimous among voting members after September's 50-basis point cut.

According to Chair Powell, the risk to the Federal Reserve's mandate (maximum employment and stable prices) is “roughly in balance”, meaning that the recalibration of the policy rate should allow the economy to maintain the strength of the labor market and make more progress on inflation. Over time, Powell said the path of policy will be moving lower towards “neutral,” with the speed and ultimate level still to be determined.

Powell is “feeling good about economic activity” and even with the interest rate reduction, policy is still restrictive. The labor market has cooled considerably from its overheated position. Inflation has moved down a great deal from two years ago and is on a sustainable path lower. The decision to move rates is just another step in securing the soft landing.

We see the Federal Reserve continuing to ease monetary policy towards the neutral rate. Futures markets believe that by the middle of next year, the committee will have cut the policy rate three times, with a 60% chance of a fourth cut.

Cash is already earning you less than it was a week ago and will likely be even lower in the coming months. We advocate for investors to position portfolios at their strategic neutral duration position. Core bonds can still provide diversification and defensive characteristics in a long-term allocation.

Additionally, a soft landing (our base case) is an environment where equities have historically performed well. We think that can continue to be the case this cycle. We prefer U.S. equities relative to the rest of the world, and see opportunities in industrials, utilities, tech and financials.

Lastly, for investors concerned about inflation, we see structural opportunities in infrastructure. Infrastructure, which has inflation-hedging characteristics, can support returns in a modestly higher inflation environment. Combined with the greater need to supply power for the artificial intelligence buildout (an estimated 2% additional power annually for the next decade), there are opportunities across power generation and power distribution, as well as digital infrastructure.

The Dollar strengthened after Donald Trump convincingly won the U.S. presidential election and the Republican party took the Senate. The House of Representatives is all but certain to be held by the Republicans, giving Trump a strong hand in shaping his economic agenda, one that is overwhelmingly bullish for USD.

"The USD bull case remains a convincing one, with US economic outperformance still clear for all to see, and with risks around the FOMC outlook becoming somewhat more two-sided into 2025, amid Trump’s reflationary fiscal agenda, and the inflationary risks posed by the imposition of tariffs," says Michael Brown, a strategist at Pepperstone.

Yet, the Pound withstood the U.S. Dollar's onslaught better than most major currencies, and GBP/USD is left consolidating within a range defined by 1.30 at the top and 1.2834 at the bottom.

The coming week could see price action contained within this area, but with the lower end tested before any rebound to 1.30 can take place.

With this in mind, we are watching the 50% Fibonacci retracement of the April to September rally. This is located at approximately 1.2868, which coincides with the lower end of the aforementioned range.

The 200-day moving average is also rising into this support area, currently at 1.2816, and is likely to offer further support.

So, we are seeing strong support levels come in, which can ensure GBP/USD doesn't fall too much further.

That said, any pro-USD impulse would potentially break this confluence of support and we could then witness a rapid decline towards the August lows at 1.2664.

The main event on the USD's calendar is the release of inflation data, due Wednesday.

Here, the expectation is for a reading of 0.2% month-on-month and 2.6% year-on-year. Anything more and we could see the USD catch a bid.

GBP/USD investment bank consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. It shows a sizeable uplift was made to the consensus forecasts for GBP/USD. Please request a copy here.

However, there has been a significant repricing away from Federal Reserve rate cuts during October as investors prepare for U.S. economic outperformance, with the market now seeing a limited number of cuts forthcoming in 2025.

We think delivering a material reduction in rates would take a significant upside surprise for the USD. This is because a large part of the reduction in rate cut bets has already taken place, and it is difficult to see too much by way of USD upside in response.

Instead, the bigger reaction could follow a softer-than-forecast outcome, given there is now more space for markets to rebuild rate cut bets.

This week's key event for Pound Sterling arrives on Tuesday when the UK releases wage and employment data.

These numbers are typically a key component of the Bank of England's decision on interest rates, and any sign that wage pressures are easing could bolster the case for a December rate cut.

The market looks for average earnings to have declined to 4.7% in September, with the figure falling to 3.9% for earnings with bonuses included. The unemployment rate is expected to have risen slightly to 4.1%.

The September data precede the budget, which looks to have been a job killer owing to the significant costs associated with employing staff (national insurance paid by employers was hiked, but the threshold at which they start paying the tax was lowered significantly).

The official data will only start covering the fallout of the decisions announced by Chancellor Rachel Reeves early in 2025.

We think the signal coming from more timely surveys, such as November's PMI survey, will be more important in this regard.

Would the Bank of England be in a position to cut interest rates if it thinks the labour market is deteriorating? Usually, the answer would be yes.

But Reeves' budget is also set to boost inflation well above 2.0% in the coming months which will tie the Bank's hands and keep interest rates higher for longer.

We will hear from Bank of England Governor Andrew Bailey midweek and then again on Thursday, where he should address last week's policy decision and matters concerning the budget's impact on policy.

His commentary could offer some near-term volatility.

The week concludes with a tranche of GDP data for the third quarter. This can provide some near-term price action. However, we don't think it will have a lasting impact on Sterling exchange rates.

This is because the third quarter is clearly in the rearview mirror, particularly given the changes to policy settings announced in the budget.

The monetary easing announced by the People's Bank of China (PBOC) in late September has already been carried out, but the fiscal part of the plan still lacks details. While the Ministry of Finance has already unveiled how the upcoming fiscal package will be used, its size will not be known until China's top legislators meet and approve the plan in early November. Reportedly, Beijing is now considering announcing a RMB10 trillion fiscal package over multiple years at the upcoming legislature meeting. The actual size could be larger if Donald Trump, whose proposed tariff hikes on Chinese imports could inflict sizable damage on the Chinese economy if implemented, wins the US presidential election.

Despite the clear direction in China's macroeconomic policy, it is still unclear how Beijing defines success. Communist Party leaders clarified on September 26 that their immediate goal is to hit this year's GDP growth rate target of around 5 percent, which was reaffirmed by the vice finance minister more recently. But it would be a missed opportunity if they just stop there. What China urgently needs now is to reverse its deflation. China's GDP deflator, a measure of overall inflation in an economy, has been negative for six consecutive quarters now. The government still has to do much more than has been announced if it is to revive inflation.

It is noteworthy that the PBOC governor, Pan Gonsheng, stated at least twice in recent weeks that an important goal of the central bank is to restore inflation. By making those statements, Pan was trying to anchor inflation expectations. However, given the PBOC does not have operational independence, whether its governor's statements can credibly anchor expectations remains to be seen.

The central bank also faces multiple constraints in further loosening monetary policy, including concerns over bank profitability, capital outflows, and the RMB exchange rate. Moreover, there is a limit to what monetary policy alone can achieve. At a time of weak credit demand, the central bank could be pushing on a string even if borrowing costs keep declining.

Fiscal stimulus is therefore urgently needed. It can make the monetary easing efforts more effective and by itself play a critical role in combating deflation. The fiscal measures announced so far are important first steps towards cleaning up the balance sheets of local governments, banks, and real estate developers. But they will likely be insufficient to revive inflation. Local governments will likely be allowed to issue more special refinancing bonds to replace more of their off-balance-sheet debt that they owe through their financing vehicles with lower-interest government bonds. In this process, some modest amount of cash will be freed up from saved interest payments at local governments, which then can be used to repay contractors, provide public services, and make new capital investments.

For the large state-owned banks, a capital injection by the Ministry of Finance through special sovereign bond issuance will allow them to expand their loan books without sacrificing on their capital ratios. But banks will use part of their enhanced lending capacity to purchase newly issued central and local government bonds. To what extent the recapitalization will incentivize the banks to respond to Beijing's initiatives and extend credit toward sectors like real estate remains to be seen.

For real estate developers, local governments will be allowed to issue additional special bonds to purchase idle land plots and excessive housing inventory back from them. Depending on the scale, this could potentially become a government bailout for some distressed developers if implemented successfully. But the self-financing requirement with local special bonds means that any land plots or housing projects that local governments purchase with the bond proceeds will have to generate enough returns to cover the interest cost of bond issuance, otherwise it would only exacerbate local governments' already huge debt burdens. The PBOC back in May created a relending facility to support local state firms with purchasing excessive inventory to be converted into public housing units, but that facility has rarely been used. Beijing's renewed push, albeit this time through fiscal policy, may again fail to garner enough interest from localities to be effective.

In any case, all these measures are meant to keep risks to the overall financial system at bay rather than directly stimulate domestic demand. What the Chinese government urgently needs to do now is to substantially raise its direct spending. Local governments have not spent all the money authorized in their budgets this year, creating a contractionary effect. The central government is now asking localities to execute their budgets more fully by issuing all the remaining special bonds that they can issue and investing the proceeds in projects with certain return prospects, especially in infrastructure, by the end of the year. But the problem remains a lack of eligible projects. Even if local governments can manage to issue all the remaining bonds, they may still find it difficult to spend the money.

A more effective way to increase government spending, as I have argued before, would be for the central government or local governments to issue more general bonds, which do not have restrictions on return prospects like the special bonds, and to invest the proceeds in areas that would directly benefit the Chinese people—such as strengthening the social safety net, public health, and education—especially for rural residents and migrant workers. But doing so would require Beijing to overcome both its longtime fiscal conservatism and its bias against direct spending on households, which will not be easy.

Industrial policy refers to a government agenda to shape industry structure by promoting certain industries or sectors. Although casual observation suggests that industrial policy can boost sectoral growth, researchers and policymakers have not yet mastered predicting or evaluating the efficacy of different types of government interventions, nor how to measure the overall short-run and long-run welfare effects (Juhasz et al. 2023, Millot and Rawdanowicz 2024). In this column, we focus on one particular example of industrial policy: the shipbuilding sector.

The history of shipbuilding is as tumultuous as the seas themselves. Shipbuilding has always held an allure for governments, in its real and perceived interactions with industrialisation, maritime trade, and military strength (Stopford 2009). Figure 1 shows the succession of countries as the world’s dominant shipbuilding nation. The UK held the lion’s shareof the industry for the better part of the 19th and 20th centuries, fending off competition from other Western European economies (mainly Germany and Scandinavia) at times. After WWII, it is swiftly overtaken by Japan, which prevails as aworld leader until the 1980s, when South Korea dominates the global market.

In the 2000s, China entered the shipbuilding scene. In 2002, former Premier Zhu inspected the China State Shipbuilding Corporation (CSSC), one of the two largest shipbuilding conglomerates in China, and pointed out that “China hopes to become the world’s largest shipbuilding country (in terms of output) by 2015.” Within a few years, China overtook Japan and South Korea to become the world’s leading ship producer in terms of output. Figure 2, PanelA shows the rise in China’s global market share of shipbuilding by plotting China’s total shipbuilding output as a share ofglobal output. China’s national and local governments provided numerous subsidies for shipbuilding, which we classify into three groups. First, below-market-rate land prices along the coastal regions, in combination with simplified licensing procedures, acted as ‘entry subsidies’ that incentivised the creation of new shipyards. As shown in Panel B of Figure 2, between 2006 and 2008, the annual construction of new shipyards in China exceeded 30 new shipyards per year; in comparison, during the same time period, Japan and South Korea averaged only about one new shipyard per year each.

Second, regional governments set up dedicated banks to provide shipyards with ‘investment subsidies’ in the form offavourable financing, including low-interest long-term loans (a common industrial policy tool, as illustrated also by theprogrammes in Japan and South Korea) and preferential tax policies. China’s rise in total capital invested in shipyards is illustrated in Panel C of Figure 2. Third, China’s government also employed ‘production subsidies’ of various forms, such assubsidised material inputs, export credits, and buyer financing. The government-buttressed domestic steel industryprovided cheap steel, which is an important input for shipbuilding. Export credits and buyer financing by government-directed banks made the new and unfamiliar Chinese shipyards more attractive to global buyers.

The combination of these policies was followed by a sharp expansion in China’s shipbuilding production, market share, and capital accumulation. China’s market share grew from 14% in 2003 to 53% by 2009, while Japan shrunk from 32% to 10% and South Korea from 42% to 32%. Then came the Great Recession of 2008-09, which drove the global shipping industry to a historic bust. The large number of new Chinese shipyards exacerbated low capacity utilisation and contributed to plummeting global ship prices. The effectiveness of China’s industrial policy was questioned. In response to the crisis and in an effort to promote industry consolidation, the government unveiled the "2009 Plan on Adjusting and Revitalizing the Shipbuilding Industry" that resulted in an immediate moratorium on entry and subsequently shifted support towards only selected firms in an issued ‘whitelist’.

Kalouptsidi (2018) and Barwick et al. (2024) study the impact of China’s 21st century shipbuilding programme on industry evolution and global welfare. To our knowledge, this work is the first attempt at evaluating quantitatively industrial policy in shipbuilding globally and among the first papers employing the structural industrial organisation methodology to understand the welfare implications and effective design of industrial policy more generally.

We build a model that is flexible enough to capture rich dynamic features of a global market for ships. On the demand side, a large number of shipowners across the world decide whether to buy new vessels. Their willingness-to-pay for new ships depends on present and expected future market conditions, notably on world trade and the current fleet level.

On the supply side, shipyards located in China, Japan, and South Korea (which account for 90% of world production) decide how many ships to produce, by comparing the market price of a ship and its production costs. In addition, shipyards decide whether to enter by comparing their lifetime expected profitability to entry costs, which include the costs to set up a new firm (such as the cost of land acquisition, shipyard construction, and any initial capital investments) and the implicit cost of obtaining regulatory permits. They exit if expected profitability from remaining in the industry falls below a given threshold, capturing the shipyard’s ‘scrap’ value (that is, the proceeds from liquidating the business, as well as any option values of the firm). Firms also invest to expand future production capacities. For estimation, we employ a rich dataset consisting of firm-level quarterly ship production between 1998 and 2014, firm-level investment, entry andexit, and new ship market prices by ship type (containerships, tankers, and dry bulk carriers, which together account for 90% of global sales).

Our estimates suggest that China provided $23 billion in production subsidies between 2006 and 2013. This finding is driven by the cost function obtained from this analysis, which exhibits a significant drop for Chinese producers equal to about 13-20% of the cost per ship. Simply put, Chinese shipbuilding firms were ‘over’-producing after 2006 compared to our prediction of output without subsidies. Altogether, China provided $91 billion in subsidies along all three margins – production, entry, and investment – between 2006 and 2013. Notably, entry subsidies were 69% of total subsidies, while production subsidies were 25%, and investment subsidies accounted for the remaining 6%. These estimates reflect the fact that shipbuilding firms ‘over-entered’ (recall the astonishing entry rates during the boom years of 2006-2008) and ‘over-invested’ (recall the striking increase in investment during the bust), as shown earlier in Figure 2.

Our structural model suggests that China’s industrial policy in support of shipbuilding boosted China’s domestic investment in shipbuilding by 140%, and more than doubled the entry rate. It also depressed exit. Overall, industrial policy raised China’s world market share in shipbuilding by more than 40%.

In terms of policy design, a counter-cyclical policy would outperform the pro-cyclical policy that was adopted by a large margin: strikingly, subsidising firms in production and investment during the boom leads to a gross rate of return of only 38% (a net return of -62%), whereas subsidising firms during the downturn leads to a much higher gross return of 70% (a net return of -30%). Moreover, if an ‘optimal whitelist’ is formed – that is, the most productive firms are chosen for subsidies – the gross rate of return would climb to 71%.

Our results highlight why industrial policies have worked better for some countries. In East Asian countries where industrial policy was often considered successful, the policy support was often conditioned on firm performance. In contrast, in Latin America where industrial policies often aimed at import-substitution, no mechanisms existed to weed out non-performing beneficiaries (Rodrik 2009). In China’s modern-day industrial policy in the shipbuilding industry, the policy’s return was low in earlier years when output expansion was primarily fuelled by the entry of inefficient firms but increased over time as the government relied on ‘performance-based’ criteria via its whitelist. Such targeted industrial policy design can be substantially more successful than open-ended policies that benefit all firms.

In terms of the rationale – why China subsidised shipbuilding – the standard arguments for industrial policy do not seem to apply especially well in our setting. The shipbuilding industry is fragmented globally, market power is limited, and markups are slim. Thus, there are no ‘rents on the table’ that, when shifted from foreign to domestic firms, outweigh the cost of subsidies. We find little evidence of learning-by-doing, perhaps because the production technology for the ship types that China expanded the most, such as bulk ships, was already mature. Spillovers to other domestic sectors are limited; in addition, more than 80% of ships produced in China are exported, which limits the fraction of subsidy benefits that is captured domestically. A scenario whereby Chinese output growth forces competitors to exit does not seem first-order either: by 2023, no substantial foreign exit occurred.

Our analyses point to two alternative potential rationales. As China became the world’s biggest exporter and a close second largest importer during our sample period, transport cost reductions from increased shipbuilding and reduced shipping costs can lead to substantial increases in its trade volume. Our estimates suggest that China’s industrial policy expanded the global shipping fleet, reduced freight rate, and raised China’s annual trade volume by 5% ($144 billion) between 2006 and 2013. This increase in trade was large relative to the size of the subsidies (which averaged $11.3 billion annually between 2006 and 2013). Of course, ‘more trade’ does not translate directly into economic well-being, but the relative magnitudes are suggestive.